Smaller insurers may benefit from increased thresholds, with those now falling below the Solvency II thresholds able to choose between operating under the non-directive firm (NDF) rules or remaining within the Solvency II regime, according to actuarial consultancy Broadstone.
The Prudential Regulation Authority’s (PRA) Policy Statement PS2/24 outlines the increased thresholds, raising the gross written premium income threshold by an additional £10 million from the previously proposed £15 million.
The PRA's statement notes that an additional six firms will fall below the Solvency II thresholds, adding to the nine previously mentioned in CP12/23. However, Broadstone anticipates that the actual number falling out of Solvency II may be lower.
Insurers operating below the Solvency II thresholds can opt to follow the NDF rules, designed for smaller firms, or stay within the Solvency II regime. Insurers must weigh the costs and benefits of operating under NDF rules, considering the transition period required before the end of 2024.
The PRA indicates that NDF rules come with lower compliance costs than Solvency II due to simpler administrative requirements, reporting expectations, and capital standards. Nonetheless, the option to remain in Solvency II is available for firms that prefer not to adapt to a different regulatory framework, especially if their growth plans may soon exceed the thresholds.
Firms transitioning to non-Directive status on December 31, 2024, must ensure their finance and actuarial reporting processes are prepared to meet the new requirements. Broadstone advises firms to prepare in advance to ensure their processes are ready before the year-end.
Cara Spinks (pictured above), head of insurance consulting at Broadstone, stated that the UK insurance market is on the brink of a significant regulatory overhaul that will affect various sector segments.
“The main impacts for smaller insurers will come from the increase in thresholds before Solvency II applies,” Spinks said. “This could be a fillip for some smaller insurers as it will increase opportunities for competitiveness and growth and allow them to expand without assuming the burden of Solvency II reporting and capital constraints.”
However, Spinks reiterated that firms falling below the Solvency II thresholds must consider the costs and benefits of operating under NDF rules.
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